Canada inflation expected to reach 2% target by 2025 Q1

Inflation in Canada continues to fall and is expected to reach the central bank's 2% target by early next year, the International Monetary Fund (IMF) said Tuesday.

"The Canadian economy appears to have achieved a soft landing: inflation has come down almost to target, while a recession has been avoided, with GDP growth cushioned by surging immigration even as per capita income has shrunk," it said.

"Housing affordability has reached its worst levels in a generation, with housing supply unable to fully meet growing demand," the IMF added in its Staff Concluding Statement of the 2024 Article IV Mission.

The financial agency said real GDP growth is expected to pick up slightly this year, supported by the recent normalization of monetary policy, some easing of fiscal policy and added that the country's financial sector remains resilient with banks well capitalized and liquid.

The IMF said carbon pricing is the most cost‑effective way to achieve Canada’s ambitious climate goals, as green industrial policies could play a role. It urged the North American country to avoid trade distortions and to maintain a level playing field for all companies.

The agency, however, warned that an abrupt global slowdown could dampen Canada's economic growth, while tighter financial conditions could negatively affect its outlook.

On the other hand, the resilience of the labor market and stronger-than-anticipated demand from the US could lead to a stronger economic growth outlook, it added.

The IMF said further interest rate cuts should continue to be carefully calibrated and dependent on incoming macroeconomic data, while it expects the monetary policy stance to remain restrictive for a while.

Annual consumer inflation in Canada came in at 2.7% in June, slowing from a 2.9% year-on-year gain recorded in May, the country’s statistical authority said earlier. The consumer price index fell 0.1% in June, following a 0.6% increase in May.

The Bank of Canada on June 5 reduced the policy rate by 25 basis points, its first rate cut in more than four years. Its next monetary policy meeting will conclude July 24.